Millennials Are Changing the Way Americans Shop for Cars…for the Better

From streaming movies to splitting restaurant tabs with Venmo, millennials are streamlining commerce in all kinds of ways. Now their enormous collective buying power is changing yet another aspect of how Americans shop: Bargaining for the family car.

It’s long been a rite of passage—if one that’s universally bemoaned—sitting at a car dealer’s cluttered desk, dickering over the price of a new vehicle.

But millennials—used to purchasing everything from music to groceries to hotel stays online—are starting to change that as a number of major care markers strike deals to sell cars at fixed list prices, according to a report Thursday in theWashington Post.

The evidence: Costco last year struck a deal with General Motor dealerships to sell 465,000 at fixed prices. Meanwhile electric car maker Tesla, which expects to sell around 90,000 cars this year, has made a practice of it. Other brands like Subaru and Lexus have also been experimenting with the practice in certain locations, the Post found.

One big reason is that, instead of assuming they will just deal with a salesperson, millennials tend to research purchases online, visiting an average of 25 sites, according to trade journal Automotive News. That means they’ve largely made up their minds by the time they arrive on the lot.

To be sure, the car business is one of the last to move into the digital age. Across the country, state laws, designed to protect dealers’ businesses, prohibit car makers from selling directly to consumers over the Internet. And some aspects of the transaction, like the value put on a trade-in and financing terms make it difficult to do away with traditional bargaining altogether. All the same, dealers are slowly being forced to adapt to the tastes of millennial consumers like most other businesses.

“We know from some of the research that we do that there are a lot of young folks that are not so intrigued by the traditional negotiation process,” Lexus executive Jeff Bracken told the Washington Post last year as it began its fixed pricing experiment. “And even a group of folks that just don’t even want to go in the dealerships.”

You won’t believe how many cars Costco sells

Discount retailer Costco Wholesale sold almost 400,000 vehicles last year, nearly twice as many as in 2008, according to Bloomberg. That puts it within sight of the No. 1 auto seller AutoNation, which sold 533,000 cars last year.

Part of it is a credit to how easy Costco has made it for shoppers–no haggling, no up-selling, no pressure and at a price less than the manufacturer’s recommended sticker price. In one example cited by Bloomberg, a Costco shopper bought a 2015 Toyota Highlander for $39,000, a $4,000 discount to the maker’s listed price.

Consumers are looking for ways around the traditional car dealership model, as seen by the rise of services like TrueCar that help shoppers compare models and pricing at home. By the end of last year, nearly 65% of car buyers said they used sites like TrueCar.

Costco COST isn’t necessarily stocking the cars themselves. The retailer works with auto-buying service Affinity Auto Group to negotiate better prices. Affinity then works with local dealerships where customers eventually pick up their new purchase.

Costco, which has more than 45 million U.S. cardholders, doesn’t actually profit off its car sales. It’s a tactic to lure and keep more members, who pay $55 annually to shop there.

Has Warren Buffett gone car crazy?

Last week, Warren Buffett made a big announcement — he’s getting into the car dealership business.

Buffett’s investment company Berkshire Hathaway BRK.A said it would acquire Van Tuyl Group, which is headquartered in Phoenix, Ariz., and is the fifth-largest owner of dealerships in the country.

So the car industry now has a titan in its midst. The next question is obvious — why?

Why is Buffett getting into a business where sales are reaching their peak, where margin is steady, but small, and where a nascent technological disruption may be on the verge of upsetting the sales model that has ruled since the 1950s?

And is it a good idea?

“I don’t think it makes sense, to be honest,” said Sarwant Singh, a senior partner and automotive industry analyst at Frost and Sullivan. “The dealership structure, especially in the US, is an age-old model that is going extinct.”

Singh is referring to the franchised-dealer car sales model: car manufacturers such as Ford F and General Motors GM have regional franchise dealers, which are owned either locally or by a chain, which is being upset by online shopping and mobile apps.

Singh expects the number of U.S. dealerships to shrink by as much as 30% in the coming years.

In an interview at Fortune’s Most Powerful Women Summit earlier this week, Buffett said he got into the business because it has high volume and low capital investment needed, meaning that even with relatively low margins, profits can be substantial. Plus, he can sell insurance and financing products. The question, though, isn’t whether car dealerships have been good businesses, it’s whether they will be in 10, 15 or 20 years, given that the industry is seeing the same technological disruption so many other post-World War II industries have.

Car-buying in the future could follow a model more similar to Tesla’s TSLA, where there is no lot, just a small showroom, and where the office is more often in a city center than in the suburbs.

Singh notes that millenials don’t like salespeople, they prefer “product champions,” like the folks working at the Apple’s AAPL Genius Bar — employees who are engaged but cool, who at least appear to be trying to help you get the product you want. They want to feel like they’re getting coffee, not engaged in negotiatory combat with a slick-haired huckster in a bad suit. That’s hard in the concrete purgatory of a car lot.

For instance, Singh points to an automotive dealership in London where 60% of the cars are purchased without a test drive. If that model grows and eventually crosses the Atlantic, that would be a bad sign for Buffett.

Analyst Greggory Warren of Morningstar MORN, though, thinks it’s hard to see a majority of the market going to stores that are Tesla-clones, leaving plenty of space for the traditional car dealership.

“If a quarter of that business goes away to a different model, that still leaves 65% of the market,” he said.

And that remaining market is wide open. AutoNation AN, the largest dealership chain in the country, owns 266 dealerships, a minuscule percentage of the approximately 17,000 in the U.S.

This means that Buffett can continue to gobble up dealerships and build Van Tuyl to be a bigger player.

Imagine the family-owned dealership in your home town. If the grandchildren of the founders decide they want to do something other than sell cars, they’ve got to sell it — enter Buffett and Van Tuyl, who can make it part of their chain.

The other big plus Warren sees in the dealership business for Buffett is the service component, which is a big part of business for dealerships.

Steve Anenen, CEO of dealer services company CDK Global CDK — which recently completed a spinoff from payments company ADP ADP — thinks that if Buffett is successful in his pursuit of acquisition, he’ll be very successful in the business.

Anenen also pointed out that he wouldn’t be shocked if Buffett got Van Tuyl into the used car business, which is a much bigger business in terms of volume in the United States.

Still, there are other reasons this purchase is a head scratcher. Auto sales are moving towards the end of a cycle. It’s expected that this year between 16.2 million and 16.4 million cars will be sold. Expectations for 2015 are hovering around 16.7 million. After that, growth will almost certainly plateau or perhaps begin shrinking again. If Buffett were going to get into the car business, it would likely have made more sense to look for an opportunity in 2011 or 2012, when the business was building to its current peak following a bigger-than-usual valley during the depths of the credit crisis. This is a short-term concern, as barring another major crisis the cycle will eventually come back around, but it’s still strange to get into a business at the end of a boom.

Warren, though, doesn’t think that’s ultimately a big deal. He said that Buffett and the Berkshire people know that it is a cyclical business, and that with the market going down, it could actually make the expansion part of the plan cheaper, perhaps evening out the cost in the long-run.

It’s hard for anyone to question an investment decision made by the Oracle of Omaha. But much like when Buffett began his foray into the world of newspapers — an industry that, unlike car dealerships, no one doubts is circling the drain — you can’t help but wonder what it is that he sees that others are missing.

The question of whether or not this investment works may depend on one thing: the ability and desire from Buffett and the largely intact management of Van Tuyl to fundamentally change.

If, 20 years from now, car dealerships have responded to technological disruption with aplomb, fundamentally shifting the way they do business, and if Van Tuyl is at the forefront of that revolution, Buffett’s bid could go down as genius.

If, though, the auto industry reacts with the general aversion to changing mores that it has in the past, and the franchised auto dealership becomes a relic to go with video rental stores and travel agents, it could be seen as a major blunder.

The big glitch in our auto supply chain

FORTUNE — The brutal winter of 2013-2014 has created lingering logistics hassles for the U.S. auto industry, as tens of thousands of vehicles remain in storage areas due to delays in rail shipments to retail dealers.

Some analysts think that the bottleneck, caused by slowdowns due to weather and shortages of rail cars, won’t be resolved until summer. Until then, customers looking for specific models may find them in short supply if they had to travel far by rail from factories or from ports of entries. Klaus-Peter Martin, a spokesman for General Motors GM, said “the backlog should be worked through by early June or July.”

The impact shouldn’t be too hard on automaker finances in the short term, because vehicles normally are booked as sales to dealers as soon as they leave the assembly plants. But dealers could be hurt if they lose sales and customers due to shortages. In some cases, buyers simply will postpone their purchases until the model they want is available.

Richard Kiley of Norfolk Southern Railway told the Detroit Newsa week ago that 180,000 vehicles were waiting to be loaded, compared with 69,000, a typical number for this time of year.

The Alliance of Automobile Manufacturers has complained of poor service to the federal Surface Transportation Board, which regulates railways.

Wade Newton, a spokesman for the trade group, said automakers “have encountered persistent rail service issues.” He said carriers’ failure to provide a sufficient supply of empty railcars to transport finished vehicles is — by far — among the greatest logistics problems facing our members.”

The railroads say the cold temperatures force them to operate trains slower than usual and with fewer cars.

Toyota reported that its RAV4 and Highlander sport utility vehicles were in short supply as a result of the delays, as well as its Lexus RX crossovers. GM’s new full-size pickup truck has been hit, as has Ford’s.

But one auto executive, noting that grain and fertilizer shipments have been hurt as well said “what’s happened to us isn’t as bad as what’s going on in other industries.”

Car buyers are still waiting for the no-haggle revolution

“One-price Car Selling Catches On” read the headline in the San Francisco Examiner. The elimination of haggling with the sales manager and his sharp pencil was “a revenge fantasy come true for anyone who’s ever suffered through a high-pressure sales pitch.” The article went on to report that a Chrysler Buick dealer in St. Petersburg, Fla. claimed that his sales had doubled since he fired his sales staff and began slapping a dollar amount on the window of every new car on his lot and told customers, “That’s our price. Take it or leave it.” The article went on to assert that “a growing number of dealerships across the U.S. have replaced haggling with fixed, non-negotiable prices.”

That news appeared in 1992 — and the number of dealers offering fixed, non-negotiable sales stopped growing almost immediately after it was published. With the economy growing and the SUV boom about to explode, dealers saw no reason to rock the boat and change the long-established practice of using the MSRP as the starting point in establishing the final price. Today, more than 20 years later, one-price, no-haggle car buying remains a curiosity. Auto retailers, traditionally resistant to change, have consistently argued that settling on prices the same way it is done in a Persian souk is beneficial for both buyers and sellers.

So it became big news in the auto world when Sonic SAH, the nation’s fourth-largest dealer group with 105 stores, announced recently that it would eliminate all dickering at its outlets by 2015. “Negotiations going back and forth and all that crap — we want to get out of all that,” executive vice president Jeff Dyke told Automotive News. “We don’t see a need for it, and neither does the consumer.”

We’ll see. No-haggle pricing amounts to a revolution in an industry that has long resisted attaching fixed prices to vehicles out of the fear that customers would merely using them as the opening bid in negotiations with a competing dealer down the street. The worry is it just creates another excuse that turns a potential customer into a dreaded “be-back,” as in “I’ll be back later.”

Flexible pricing is a difficult habit to break and requires an overhaul of dealership practices and retraining of the sales force. Sonic has been moving toward one-price for more than a year and is leaving itself some loopholes, such as allowing a manager to cut a price to meet a competitor’s offer. And it will still continue to adjust its prices weekly or even daily to make sure they reflect demand in a local market.

The change is overdue. The current system is so 20th century — like the New York Stock Exchange back in the era of specialist posts and paper tickets. Today’s car buyers are brainiacs compared with previous generations. They have access to volumes of data and can walk into dealerships armed with information on invoice prices and the cost of accessories from sources like Edmunds.com and Kelley Blue Book, as well as retail and wholesale prices for their trade-in.

Dealers have long maintained that some customers simply like to negotiate, and they continue the practice to satisfy them. But others are moving away, gradually. One popular dealer alternative is to negotiate three price levels: a top one for full sticker, a bottom one for sharp pencil, and a third in-between.

Until the passage of the Automotive Information Disclosure Act in 1958, there was no such thing as a manufacturer’s suggested retail price. Dealers were allowed to crayon any amount they wanted on the windshield of a new car to use as a starting point for price negotiations. There was also a poorly understood transaction — which continues today — called the “hold-back,” in which the manufacturer rebated 2 or 3% of the price of the car to the dealer after the sale — a payment that wasn’t disclosed to the buyer.

The most-extensive and longest-lasting experiment in fixed-price selling involved General Motors’ Saturn Corp., which operated from 1990 to 2009. The system worked at first because GM GM had awarded exclusive territories to Saturn dealers so there was no direct competition and the cars were in hot demand. Once the demand cooled and dealers found the cars harder to sell, they bent the fixed-price rules by burying discounts in lavish customer trade-ins.

Today the largest user of one-price is probably CarMax KMX, the used-car superstore, which advertises a “no-haggle price” with the explanation that “you shouldn’t have to argue to get a fair price.” It goes on to claim that “you’ll get a great car at a great price, without all the stress and worry of traditional used-car sales.” A great price, perhaps, but not the best price. CarMax offers a wide selection of vehicles from multiple manufacturers and a money-back, five-day guarantee. As a result, customers pay more than they would in a typical transaction for a used car.

And that is what it is going to take to make one-price selling industry-wide. The dealer has to offer the customer something he can’t get somewhere else. That could be anything from a nicer showroom to a popular model not available elsewhere. If the dealer has nothing extra to offer and has to compete on price alone, then he better have the flexibility to negotiate.

As for Sonic, it hopes that by eliminating time-consuming price negotiations and its tiresome theatrics, it can attract customers by streamlining the car-buying process. Unlike two decades ago, car selling may actually be ready to make the leap into the 21st century. Offering better service is a far better incentive for customers than “That’s our price — take it or leave it.”

When will car dealers get with the web?

For a century or so, the shopping ritual at dealer showrooms for new and used vehicles hasn’t changed much, apart from more comfortable chairs and the addition of latte machines.

But the Internet is unraveling the essence of new-car retailing, arming shoppers with more information than ever about features and prices, as well as expert reviews. Will shoppers soon be able to take the next step and order new cars online, like books, laptops and shoes?

The debate over Internet vehicle sales rages, since automakers see it as a way to slash distribution costs by hundreds, and perhaps a few thousand dollars per vehicle. Dealers are aghast: They have shielded their franchises in every state with legislation. Many view Internet sales as a means of undermining them. Dealers assert that “cars aren’t books or shoes” and are best sold in person by their sales staff, a process that allows the shopper to test the vehicle, as well as explore financing and trade-ins.

Tesla Motors TSLA, the groundbreaking electric-vehicle manufacturer founded by Elon Musk, takes orders for its Model S sedan, which starts at $70,000, on its website. The cars are delivered either at one of its 30 company-owned stores or can be drop-shipped to a buyer’s home. Tesla, clearly, is bucking law and tradition. “In Texas, where the law precludes delivering directly to customers, we do so through third-parties,” said Shanna Hendriks, a Tesla spokesperson. “We’re not saying we’ll never have dealers; but that model doesn’t make sense for us now.”

Seth Berkowitz, president and chief operating officer of Edmunds.com, said “the current franchise system makes it difficult to imagine a time when consumers can order new cars online completely separate from a specific showroom experience.” Berkowitz said Edmunds is offering a feature that would allow shoppers to know exactly what a specific car will cost before they come to the dealership.

Because the market for used cars isn’t protected by new-car franchise laws, it may provide a more promising opportunity for online vehicle sales. eBay Motors, a division of eBay EBAY, offers thousands of vehicles online for sales between private parties. Many used-car dealers also use the digital platform and pay a listing fee.

Carvana, a venture sponsored by DriveTime, one the nation’s largest used-car operations, has begun selling late-model used premium and luxury models on its own website. Carvana operates for the time being only in Atlanta and its environs but hopes to expand nationwide. “What we’ve learned from our early experience is that shoppers like our on-line tools and money-back guarantee,” said Ernie Garcia Jr., Carvana’s chief executive officer. Barely in business for eight months, Carvana declines to specify how many vehicles it has sold, except to say that the rate is accelerating.

Garcia did say that the first hundred vehicles sold by Carvana reflect what he called a “promising” trend of high satisfaction among buyers. Four buyers of the first hundred weren’t satisfied with their purchase and exercised their right to trade the vehicles they bought for another. Only one of the hundred demanded a refund.

Garcia said that sales of new and used vehicles at dealerships, in the conventional manner, reflect about “$2,000 a car” in sales, general and administrative cost. He regards that amount as margin that can and will eventually shrink as online attracts more vehicle shoppers.

Jeff Jones, Internet director for Al Serra Auto Plaza, a new-car dealer in Grand Blanc, Michigan, said his company is cooperating in an on-line pilot program with General Motors GM. Visitors to GM websites can “build” a vehicle and equipment online — the last step, the transaction, takes place at the dealership. “It still takes a human element to make sure the customer is eligible for financing and to see if the customer is choosing the right vehicle for him or her,” said Jones.

New-vehicle sales online haven’t arrived, and perhaps may never. Yet that day feels as though it’s drawing closer, especially for consumers who will choose anything and everything — including a spouse — using keypad or mouse.

Truecar is running into roadblocks

Truecar, the latest Internet startup to carve a niche in automotive retailing, is running into roadblocks as it tries to expand.

The Santa Monica, California-based company is scrambling to avoid a host of legal and public relations pitfalls so it can expand its car-buying service, which it claims already accounts for some 2.8% of all retail auto sales. That proportion would translate to about more than 364,000 sales a year, or about $110 million in revenue, for Truecar.

As Fortune reported, visitors to Truecar’s website can survey information about cars, including recent prices at which similar vehicles sell, and then may solicit quote from dealers. If a dealer makes a sale to a shopper based on a lead from Truecar, the dealer pays the company $300. Other automotive sites, such as Edmunds.com, gain revenue by selling leads to dealers, irrespective of whether those leads turn into sales.

Truecar said it has suspended operations in Colorado after the state opened an investigation in December into whether the company was complying with regulations covering advertisers and whether it had the required licenses to act as an agent for car buyers. On Wednesday, the company said it adjusted its billing practice, dropping the fee and charging a subscription instead, to comply with laws in Virginia and all others prohibiting “bird-dogging,” or finding customers for dealers.

At the heart of Truecar’s troubles are a multitude of state laws designed to protect the franchises of automobile dealers and to control unbridled competition among dealers to sell vehicles. Some customers have complained to states that the car they expected to buy wasn’t available at a dealer, as they expected.

The company has been quick to respond. “Truecar is committed to never putting our dealer partners at risk, which means we will always work closely with regulators to identify a workable solution or suspend service,” said Scott Painter, Truecar founder and CEO, in a prepared statement.

Over the past two decades the Internet has become a significant factor in retailing, though more so in categories like appliances and apparel than in vehicles. Franchise agreements stipulate that customers in the U.S. must buy from dealers, rather than online. Hence, ventures like Edmunds.com and Kelly Blue Book have built websites that allow shoppers to find information about cars and prices, as well as to solicit quotes from nearby dealers.

Edmunds and Kelly typically sell sales leads to dealers at a fixed price or through subscriptions, irrespective of how many of them turn into sales. The leads are created when on-line shoppers fill in forms and declare their interest in buying a vehicle. Truecar broke from the more common model by giving leads to dealers free of charge, instead imposing the $300 fee only on those that turned into sales.

Avi Steinlauf, chief executive officer of Edmunds.com said: “Edmunds.com’s mission is to inform and educate consumers and to create realistic expectations about the retail process. In the process, we do not impose prices on dealers, we do not create false consumer expectations, and we do not break the law.”

Rather than charge dealers according to the number of leads, Edmunds.com recently modified its pricing model. Edmunds.com now sells access to its leads via a subscription fee to its service.

Honda Motor Co. HMC has told its U.S. dealers that it will withdraw advertising support monies from any dealers that advertise “below invoice” pricing of its cars. Honda says “below invoice” violates its standard covenant with dealers who accept advertising support.

Honda regards Truecar as an advertising platform and says Honda dealers have used the buying service to advertise below-invoice pricing of Honda vehicles. John Mendel, executive vice president of Honda’s U.S.-based sales subsidiary, said “we never tell our dealers with whom they may chose to do business. However. we are passionate about protecting our customers and the Honda Brand and will not support any actions to the contrary.”

Penske Automotive PAG, with more than 150 dealers in the U.S., has elected as a matter of policy not to transact sales using Truecar. Group 1 Automotive, another dealer chain, said it has instructed dealers to stop sharing pricing information with Truecar. According to Group 1, In some instances Truecar gained access to specific descriptions of transactions and precisely the amounts customers paid for cars. Edmunds and Kelly, by contrast, only use an average of a large number of sales to tell visitors to its websites an approximate value of specific models.

The Truecar initiative is under intense regulatory scrutiny in several states and the subject of vigorous debate among dealers and manufacturers. How the numerous hassles are resolved could have a bearing on how customers will shop for their next cars.

Editor’s note: A previous version of this story incorrectly calculated the number of annual car sales that Truecar has likely arranged, based on the company’s claim of a 2.8% share of the market. This calculation has been corrected.